A Newsletter for Individuals Concerned About Poverty in Missouri
The media attention surrounding the budget debate in Washington has, unfortunately,
created some misconceptions about taxes. For example, many eligible workers think that the
Earned Income Credit (EIC), a special federal tax credit for low-income workers, has been
cut or eliminated. While Congress is debating cuts, they have enacted no cuts. Any changes
in the credit would not take effect until families file tax returns for tax year 1996. For
now, the EIC is bigger than ever. Another myth is that very low-income workers without
children are no longer eligible for the EIC. That is a possibility for next year, but this
year they can still get the credit. For tax year 1995, more families will be eligible for
the EIC than ever before.
This Poverty At Issue returns to the issue of taxes and highlights what's new for tax year 1995. It provides detailed information about the EIC and another tax credit that can be valuable to low-income, working families. It offers suggestions to help taxpayers file returns accurately and efficiently. By using the information presented here, some workers can avoid delays in the processing of refund checks like so many experienced last year. There is also important consumer information to help decide whether to use a paid tax preparer, and if so, help select one.
I hope you find the information helpful.
Consumer and Family Economics Specialist
Social Security numbers are required on tax returns for any dependent born before November 1995. Next year, all dependents born before December 1996 will need numbers. For 1997 and beyond, all dependents must have numbers.
It is crucial that the names and numbers of dependents appear EXACTLY as they appear on Social Security cards. If you have misplaced Social Security cards for your dependents or if you haven't applied for their numbers yet, call the Social Security Administration toll-free at 1-800-772-1213 for instructions. Many EIC recipients and other taxpayers had their refunds delayed last year because of mismatches with Social Security Administration records.
Taxpayers can now have their tax refunds deposited directly into their checking accounts. The refund check arrives sooner and there's no risk of someone stealing it. To arrange for direct deposit, fill out Form 8888 and attach it to the tax return. Form 8888 will be in tax packages for Forms 1040 and 1040A. Or call 1-800-TAX-FORM.
Recipients of unemployment compensation benefits now can use Form 1040EZ. This is part of a continuing IRS effort to simplify procedures.
IRS raised the standard mileage deduction rate to 30 cents, up one cent from the previous tax year.
The Earned Income Credit (EIC) is a Federal income-tax credit for working families with
low incomes. It was designed to give a financial break to low-wage earners, make work more
attractive than welfare, and stimulate economic activity in low-income communities.
Last year, more than 376,000 Missouri families received some $405 million in benefits, which brought more than $1 billion in economic activity to the state. The EIC is available to married and single parents or caregivers. Very low-income taxpayers without children may also receive the EIC. At this writing, Congress is considering benefit cuts and changes in eligibility requirements. Changes will not go into effect until tax year 1996. Agency providers and others who work with low-income Missourians can help families take advantage of the EIC and debunk the myth that cuts are already in effect.
Working individuals or married couples, with or without children, who earned
less than $26,673 in 1995 may qualify for EIC benefits. Workers who earned at least $1 are
eligible if they meet certain requirements even if they owe no income tax.
Families with one "qualifying" child living in the household in 1995 and an earned income less than $24,396 can get up to $2,094.
Families with two or more "qualifying" children in their home in 1995 and an earned income less than $26,673 can get up to $3,110.
Single or married individuals without children, who are at least 25 and younger than 65, and who had an earned family income less than $9,230 can get up to $314.
A "qualifying" child can be a person's own biological or adopted child, grandchild, foster child, niece or nephew, sibling, or any child being raised as a member of the family. It doesn't matter who claims the child as a dependent. Usually, the EIC does not affect other benefits like AFDC, food stamps, SSI, Medicaid or public housing. The enclosed Earned Income Credit fact sheet from University Extension provides more detail.
If you were raising children in 1995, file Federal tax return Form 1040 or 1040A, not
Form 1040EZ. Be sure to attach Schedule EIC.
If you weren't raising children in 1995, just file any Federal tax return.
To get more information or to find out how to get free help filling out tax forms, call the IRS toll-free at 1-800-829-1040. Call early in the day and be patient. The number is often busy.
Workers who will get the EIC and are raising at least one child can get part of their
benefits throughout the year in their paychecks. It works like withholding, only in
reverse. The employer simply puts part of the expected credit into a worker's paychecks in
equal installments throughout the year. The worker gets the rest by filing a tax return at
the end of the year. In fact, workers who use the advance payment option must file
a Federal tax return and Schedule EIC at the end of the year.
Advance payments do not cost employers any money. They simply subtract what they paid out in EIC advance payments that they have added to workers' paychecks from what they would otherwise deposit with the IRS. Under federal law, employers must give advance payments to workers who ask. Getting advance payments is easy. Eligible workers fill out a W-5 form, the "Earned Income Credit Advance Payment Certificate" and give the bottom part to their employer.
Employers should have a W-5 form on hand or the worker can order one free by calling 1-800-TAX-FORM. To keep receiving advance payments without interruption, the worker must file a new W-5 at the beginning of each year. Workers can begin advance payments any time during the year.
Advance payments are set up based on the EIC benefit expected at the end of the year. So that they do not end up owing IRS at the end of the year, advance payments should be carefully considered by workers:
Anyone already getting advance payments and whose situation changes in any of the ways
listed above can notify their employer to stop advance payments anytime.
Workers are not allowed to get advance payments if they:
Anyone with questions about advance payments can call 1-800-829-1040 for information.
Employers can refer to IRS Circular E, which they should have received from the IRS, for
information about advance payments.
by Edward J. Metzen, Professor and Chair,
UMC Department of Consumer and Family Economics
Several plans to replace the current Federal income tax with a "flat tax" system have been proposed. Under such a system, the same tax rate would be applied to taxable income at all income levels. What all these plans have in common is greatly reduced taxes for those with very high incomes, compared to what they pay under the current system. To accomplish that reduction, one or a combination of things must result: (1) high taxes on middle-income taxpayers, (2) a major increase in the national debt, (3) major reductions in social programs, or (4) a combination of these. One of the most widely considered "flat tax" plans would provide for reductions in income taxes for every income group except those below $15,000, who would have a tax increase. Redistribution of the total tax burden would result in greater maldistribution of income and wealth, and thus push our country farther toward a have, have-not society.
The argument that a "flat tax" stucture is necessary to simplify our income tax structure is false. The tax structure can be simplified by removing the loopholes used to avoid taxes, while maintaining a fair, progressive system of tax rates.
Besides TeleFile, there are other services available to make tax filing easier and more
efficient. By dialing 1-800-829-4477 toll-free, you can check on the status of your tax
refund and hear recorded information on tax topics. Topics include the EIC, child
care/elderly credit, dependents, electronic filing, which form to use, and what to do if
you can't pay your taxes.
Telephone tax assistors will answer 20 million calls this season at 1-800-829-1040. IRS-sponsored Volunteer Income Tax Assistance (VITA) sites offer free services to low-income taxpayers who need help filing their taxes. Tax Counseling for the Elderly sites are available with free help for elderly taxpayers. Both are staffed by local volunteers who have been trained by IRS. Sites are open from late January through April 15 and many can file returns electronically. Unfortunately, some rural areas do not have such programs available. Call 1-800-1040 to find out if there is a site near you. In Missouri, call Taxpayer Education at 314-539-3660 to find out how to help set up tax assistance sites in your community. Walk-in help is available at IRS offices nationwide, but budget reductions mean that fewer assistors are available this year for face-to-face consultation.
Do you want to file your tax return in ten minutes in the middle of the night without
leaving your house? Maybe not, but if you're one of 23 million lucky taxpayers, you could.
This year, the IRS is implementing a new 24-hour-per-day system for filing simple income
tax returns. TeleFile takes about ten minutes to use. All you need is access to a touch
tone telephone. To use TeleFile, you must be single with no dependents, have a taxable
income less than $50,000, have filed a return last year, have the same address as last
year, and have received a special tax booklet with a Personal Identification Number (PIN).
The system will calculate the tax due and the amount of the refund or additional tax owed.
It is available in both English and Spanish. Instead of signing a return, you use the PIN
to certify the accuracy of your own information. Refunds are mailed out about three weeks
later and any amount owed is still not due until April 15. According to Larry Mosblech,
the EIC coordinator for the St. Louis District IRS Office, the system was piloted in
several locations last year. "We're encouraging eligible taxpayers to use the system.
It's fast, efficient and easy to use," says Mosblech. About 23 million taxpayers will
receive a special PIN and instructions for using the new paperless system.
Commercial tax preparers typically offer these services for a fee:
It is important to keep in mind that, just because you pay to have a return filed
electronically, you do not have to get a "quick refund." Filing electronically
means the refund will still come back sooner than if the return had been mailed. Quick
refunds are really short-term loans. If you push a pencil, you find that their effective
annual interest rate can be 175% or higher. If your refund doesn't come back from IRS in
the amount calculated, you must pay the commercial preparer the difference. Because the
IRS has tightened up on the rules for quick refund providers, the business is considered
much riskier and many providers have increased fees or quit making the loans.
by Carole Prather, Consumer and Family Economics Specialist, University Extension
While most taxpayers might agree that taxes are a necessary evil, they would be much less likely to agree about whether a tax is fair or not. When it comes to taxes, fairness usually means that how much tax a citizen must pay is somehow related to their ability to pay. Since not all taxpayers have the same income or assets available to pay their taxes, a tax which is equal for all taxpayers is not necessarily the most fair. This is why the income tax was set up as a progressive tax.Citizens who earn more income pay not only more dollars in tax, but a higher percentage of their income in tax. As painful as income tax is to many taxpayers, it is often cited as one of the most fair taxes in the total tax structure. On the other hand, some taxes which appear to be more fair because they are assessed equally, actually turn out to place a greater burden on individuals with the least resources. These are the regressive taxes.
Regressive taxes are those taxes where the rate of taxation, in relation to income, remains the same or declines as income increases. As income goes up, regressive taxes take a smaller and smaller percentage of the taxpayer's earnings. A prime example of a regressive tax is state sales tax. On the surface it appears very fair because the same tax rate is applied to each citizen when they make a purchase. In truth though, the sales tax places a greater tax burden on those citizens with the least ability to pay. For example, suppose you have two families each with three members. The Jones family spends $300 dollars a month on food in a community with a 7% sales tax. Over a year's time they will pay $252 in sales tax on their food. If they have an annual income of $12,000, the sales tax on their food takes 2.1% of their total income. The Miller family also spends $300 a month on food and pays a 7% sales tax. But the Miller family has an annual income of $25,000, therefore the $252 they pay in sales tax for their food takes only 1% of their annual income. Looking at the tax in relation to income makes the sales tax on food twice the burden to the Jones family as the Miller family. This is why state sales tax is often cited as one of the least fair taxes in the total tax structure.
Another example of a regressive tax is the OASDI (old age, survivor, and disability income) portion of social security tax. Currently, 6.2% of total earnings for each citizen is withheld for this tax. However, only the first $61,200 of annual earnings per citizen is subject to this tax. Therefore, if Citizen A earns $40,000 a year, he would pay $2480 to Social Security for the OASDI benefit. Citizen B earns $120,000 a year and would pay $3794 to Social Security for this benefit because he only pays on the first $61,200 of earnings. Citizen A sees 6.2% of his total income going for this tax. Citizen B, earning three times as much, has only 3.1% of his income going for this tax.
Taxes which are set up using a regressive tax structure give the initial appearance of being fair because they are typically levied equally. Looking more closely at the impact of regressive taxes, it becomes clear that they penalize those citizens with the least ability to pay. Some states have recognized the hidden impact of sales tax on the low income by exempting two necessities of life, food and medicine, from this tax.
The Child and Dependent Care Credit is a tax benefit that helps families pay for child
care or care of a dependent adult who is incapable of self-care. It reduces the amount of
income taxes you owe and can lead to a much larger tax refund at the end of the year.
Families earning too little to owe taxes cannot use the credit. In this way, the Child
and Dependent Care Credit is different from the EIC. Families who earn too little to
owe any income tax at all can claim the EIC. It is also important to note that getting
the Child and Dependent Care Credit does not affect a family's eligibility for the EIC and
An individual can claim the credit if he or she:
Special rules apply for the income of a spouse who was a full-time student or disabled and for children of divorced or separated parents. For more information about these rules, call the IRS at 1-800-829-1040 or the National Women's Law Center at 202-328-5160.
Sources and Acknowledgements
Center on Budget and Policy Priorities
Reviewed for Technical and Accuracy by St. Louis District IRS Office.
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Jeanne Bintzer, HES Extension Site Administrator
Brenda Procter, Consumer and Family Economics Specialist, Content Provider